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Theoretical analysis regarding a zero lower bound on nominal interest rates

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  • Bennett T. McCallum

Abstract

This paper explores several issues concerning a possible zero lower bound (ZLB) including its theoretical rationale; the magnitude of effects of low sustained inflation on real interest rates; the validity of analyzing monetary policy in models with no monetary variables; and the dynamic stabilizing properties of Taylor rules in a ZLB context. The most important argument, however, is that if the short nominal rate is immobilized at zero, there nevertheless exists a route for monetary stabilization policy to be effective--via the foreign exchange market. Its quantitative importance is examined in a calibrated, optimizing, open-economy model.

Suggested Citation

  • Bennett T. McCallum, 2000. "Theoretical analysis regarding a zero lower bound on nominal interest rates," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 870-935.
    • Handle: RePEc:fip:fedbcp:y:2000:p:870-935
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    More about this item

    Keywords

    Monetary policy; Inflation (Finance); Interest rates; Foreign exchange market;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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